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spk01: Hello and welcome to the Avantax 4th Quarter 2022 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then 1 on your telephone keypad. To withdraw from the question queue, please press star, then 2. Please note, this event is being recorded. I would now like to turn the conference over to D. Luttrell. Please go ahead.
spk06: Thank you and welcome everyone to the Avantax fourth quarter 2022 earnings conference call. On Wednesday afternoon, following market close, we posted our earnings release and supplemental information on the investor relations section of our website at Avantax.com. I am joined today by Chris Walters, Chief Executive Officer, and Mark Melman, Chief Financial Officer. Before we begin, let me remind everyone that today's discussion contains forward-looking statements that speak only as of the current date. As such, they include risks and uncertainties, and actual results and events could differ materially from our current expectations. Please refer to our press release and our SEC filings, including our most recent Form 10-K and Form 10-Q for more information on some of these specific risks and uncertainties We assume no obligation to update our forward-looking statements except as required by law. We will discuss both GAAP and non-GAAP financial measures today. Our earnings release and supplemental financial information are available on the investor relations section of our website at avantax.com and include full reconciliations of non-GAAP financial measures discussed to the nearest applicable GAAP measure. With that, let me hand the call over to Chris.
spk02: Thank you, Dee. Good morning. Good morning. I'm pleased to share our fourth quarter 2022 earnings results for the first time under the Avantax name. On January 26th, we changed our corporate name from Blue Cora to Avantax and changed our ticker symbol to AVTA, marking our next step as a pure play wealth management company. During our third quarter earnings call, we shared that we had agreed to sell our TaxAct software business to an affiliate of Sinvin for $720 million, subject to post-closing adjustments. On December 19th, we announced the completion of the Sale of Tax Act, which positioned us to shift our organization to reflect our singular focus on continuing to grow our wealth management business and return capital to shareholders. We successfully achieved these milestones while at the same time having a record-breaking year in many of our key wealth management operating metrics. I would like to thank all of our financial professionals, employees, and board members for their contributions to realizing these accomplishments. As noted, we have made significant progress on our more focused operations and capital structure. On operations, we have begun streamlining our organization and are positioning our team to execute our wealth only growth strategy. As part of this work, we have announced the plan to reduce the size of our board of directors at our 2023 annual meeting and the departure of multiple executives whose contributions are greatly appreciated. Our team has been aligned to deliver our strategic priorities of growing NNA by supporting existing financial professionals' growth and recruiting new financial professionals and accounting firms, retaining existing financial professionals by providing exceptional service and tools, and when in the best interest of the client, shifting to a higher value mix by increasing fee-based assets and continuing RIA acquisitions. We've also made targeted incremental investments to support our financial professionals and affiliated CPA firms. On capital structure, in January, we repurchased 460,160 shares for a total of $12.5 million. On January 24th, we entered into a new term loan facility of up to a maximum principal amount of $270 million that also provides for a $50 million revolving credit facility. This facility has a lower interest rate compared to our previous credit agreement, has a delayed draw feature that further enables us to keep interest costs down, and does not have significant upfront costs as compared to other options. On January 27th, we announced that we commenced a modified Dutch auction tender offer to purchase up to $250 million of our common stock for between $27 and $31 per share. This is in addition to our approved $200 million share repurchase authorization. Moving on to our results for the fourth quarter, we continue to excel across the most important indicators that we use to measure the performance of our business. First, our net positive flows. We have seen net positive asset flows for the fourth consecutive quarter. In Q4, we had $495 million in net new assets, up $115 million over last quarter and setting a new record of $1.3 billion for the business for the trailing 12-month period. Second, our recruiting. We also continued to successfully recruit financial professionals with over $401 million in newly recruited assets during the fourth quarter, finishing another record year, adding approximately 79% more in recruited assets than our next best year. We also recruited three new CPA firms to Avantax Planning Partners and have a strong pipeline for 2023 in both our independent broker-dealer model as well as our employee-based RIA. Third, our firm acquisitions. This quarter, we marked a milestone with 20 acquisitions completed in 20 months, increasing total client assets held in our employee-based model to approximately $7 billion, up from $4.4 billion a little over two years ago. Fourth, we continue to retain productive financial professionals. Our consistently high production retention rate came in at 99.3% for the quarter. Of the financial professionals who departed during the quarter, 90% were non-producing financial professionals with less than 50,000 enrolling gross production. Lastly, our financial professional satisfaction. We regularly conduct financial professional satisfaction surveys to assist us in better meeting our financial professional needs. In the survey, our net promoter scores improved by 14 points from our spring 22 survey and 21 points from winter survey last year. In short, we are executing well on our mission to be the leader serving a community of CPAs, tax professionals, and tax-focused financial professionals by providing clients tax-advantaged investment solutions, innovative technologies, and tax-inclusive financial planning. We remain focused on extending our lead on key differentiated aspects of our strategy, which include nurturing and growing the largest community of tax-focused financial professionals in the wealth management industry through training, growth communities, coaching programs, and purpose-driven events, providing best-in-class service and support, and delivering capabilities to accelerate our financial professionals' growth, including continuing to develop investment solutions, growth consulting, practice management, and digital products. In addition to these efforts, we are providing opportunities for financial professionals to work with Avantax in the way that aligns with their priorities, which has led to a rapidly growing Avantax Planning Partners, our employee-based RIA, and resulted in a significant pipeline to further grow this portion of our business. Our pure play wealth management business is effectively executing on plan, is serving our financial professionals and end clients well, and is taking actions on our capital structure that, together, we believe will result in an exciting future for our financial professionals, employees, and shareholders. Now, I'll turn it over to Mark, and we'll be happy to answer questions after the prepared remarks.
spk05: Thank you, Chris, and good morning, everyone. The work over the last several months since the announced sale of Tax Act has culminated in this moment where we can share our financial results as a standalone wealth business. And as you can tell from our financial performance, our business is strong. Starting with fourth quarter results, as Chris mentioned, we are thrilled to have executed well this quarter. 2022 was a strong year for the business. Avantax broke records for recruited assets, total net new assets for the year, and the percentage of our assets and advisory. Now on to fourth quarter financial results. Total revenue of 172.4 million dollars was a record for the business, slightly up from the fourth quarter of the prior year, up 4% versus the third quarter of 2022, and above the high end of our guidance. Achieving this record revenue figure, despite the market being down meaningfully, is a reflection of the favorable interest rate environment, as well as asset mix shifts we've seen in our portfolio. Return on assets is up 109 basis points versus Q4 of 2021. Transaction-based commission revenues were $19 million, an increase of 7% sequentially. Year-over-year, transaction-based commission revenues decreased 21% for the quarter and 16% for full year 2022. As it is difficult to tell from the discontinued operations treatment, for ease of comparison, the adjusted EBITDA for both continuing and discontinued operations came in at $18.6 million for the fourth quarter, which is near the high end of our guidance. As for adjusted EBITDA for continuing operations, the result was $25.9 million with performance driven by favorable revenue performance and lower than expected costs in the quarter. Q4 is a higher expense quarter than Q3 because of the national conference. GAAP net income was $368 million or $7.66 per diluted share, included in our GAT net income is a pre-tax gain on sale of tax acts of $472.2 million. A few other details regarding our performance this quarter. Our payout rate in the fourth quarter decreased to 74.2% from 75.1% in the third quarter, the lowest rate we have seen since Q1 2021 when it was 74.4%. We will see fluctuations in payout rate depending upon the concentration of transaction-based revenues, the makeup of net flows, and the mix of assets in the quarter. We ended the year with total client assets of $76.9 billion. Fee-based advisory assets were down 9% year-over-year, $38.3 billion, with advisory assets as a percentage of total client assets ending the quarter at a new high of 49.8%. Net flows into advisory for the year were $2.9 billion, with $638 million in the fourth quarter, with total client assets having net inflows of $1.3 billion for the year and $495 million for the fourth quarter. We have driven our newly recruited assets for full year 2022 to $1.7 billion, versus $929 million in 2021, which was a record for the business at that time. As shared previously, our goal is to drive 2% to 2.5% organic growth per annum via newly recruited assets. Turning to the balance sheet, we ended the year with cash and cash equivalents of $264 million and no debt, as we paid off the outstanding term loan with proceeds from the Tax Act sale. We have subsequently entered into a term loan pay with a newly established banking group where we can borrow up to $270 million over the next 12 months, along with a $50 million revolver. We expect to draw $170 million in late February to help fund the tender offer with the remaining capacity of the $270 million term loan expected to be borrowed over the course of the year to primarily fund continued share repurchases. We were pleased with the financing result and the confidence our bank group showed in our business. We believe the interest rate and low cost of fund are attractive relative to other options that provide us the opportunity to create meaningful value. Our capital allocation priorities continue to be returning capital to shareholders following the tender offer under the remaining $187.5 million in our repurchase authorization. Investing in our business to fuel growth and continuing to execute on our acquisition program of individual financial professionals into our employee-based model. For the medium term, we expect our net leverage ratio to be between 1.5 times and 2.5 times. With that, let's turn to our full-year 2023 outlook. We expect full-year revenue between $750 million and $758 million and adjusted EBITDA of $124.5 million to $135.5 million. These figures assume 4% market growth from the end of 2022 with 1% growth per quarter. As it relates to Fed funds rates, we continue to leverage the forward curve, and at the time of finalizing our guidance, assumes one more 25 basis point hike in March. Other factors that can drive revenue outcomes include the performance of transaction sales and the timing of asset flows throughout the year. Guidance assumes that we will drive meaningful cost efficiencies in the business that will be realized throughout the year with a larger amount following the provision of transition services in connection with the Tax Act sale, which we believe will mostly be completed by the end of the third quarter 2023. With respect to GAAP net income, We expect between $25.5 million and $40.1 million in GAAP earnings per share of 63 cents and 96 cents per share. We are anticipating between $7.8 million and $14.5 million in adjusted expense items relating to the cost of delivering cost savings, potential proxy matters, and other one-time items related to the sale of tax action. Lastly, we have assumed between $12.7 million and $13.5 million in interest expense, roughly $14 million in depreciation, and $25 million in amortization expenses for the year. This concludes our prepared remarks. We will now turn the call over to the operator for Q&A. Operator?
spk01: Thank you very much. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Today's first question comes from Josh Siegler with Cantor Fitzgerald. Please go ahead.
spk04: Yes. Hi. Good morning. Thanks for taking my question. Now that management has a sole focus on the wealth management business, what are you most excited about for allocating more of your time to, and how are you thinking about growing your competitive advantage over this next year?
spk02: Interesting. This is really a continuation of the strategy that's been working incredibly well, and so we are intensely focused on executing that. As you know from a time and attention perspective, We're delivering TSAs through late this year, and so there still is time associated with supporting the tax act business. That said, the elements of our strategy that have been working have been a significant improvement in our business development efforts. This is recruiting new financial professionals to the platform where we're setting records. So we're excited to lean into that even more. Delivering exceptional customer service. to our financial professionals to be the best, easy partner for them to work with. And as we make things easier for them, they have more time to grow their business. And then supporting them in their growth efforts in every way from growth consulting to some of the phenomenal events that we put on that are training and education. And so we are actually focused in all those areas. And finally, technology, right? Technology and tools that improve their efficiency. And so as we talk about that increased focus, we're spending time in each one of those areas as we have over the last few years.
spk04: Understood. That's helpful color. Thank you very much. I want to also dial into one specific KPI. You know, advisory assets as a percentage of total assets continue to trend positively throughout the year with healthy net new assets despite negative market impact. Do you expect this trend to continue in 2023 and advisory assets to become a larger part of the mix? Thanks.
spk02: Yes, we have talked about high-value mix shifts being an important part of our growth strategy going forward, and we expect the trends that we've seen to continue.
spk04: Got it. Thank you.
spk01: The next question comes from Dan Kernos with The Benchmark Company. Please go ahead.
spk03: Great. Thanks. Good morning. Strong finish to the year, and congrats on yet another name change. I've been around this name for a long time. Maybe just one for Mark first, just housekeeping on the TSA. Is there any way to tease out the economic impact so we can kind of understand the clean run rate of the pure play business once the TSA is finished?
spk05: Yeah, so the TSA is expected to run for a minimum of six months and up to nine months. And there are a fair amount of operational support that we're providing, considering that the sale closed so close to tax season. So what's a little bit difficult to provide an exact number is certain elements of those operational support elements are going to fall off sooner than others. And so each quarter when we report our results, we'll be teasing out the income associated with the TSA from the core part of our financial performance. So that'll make it easier for you to see what came from underlying operations versus the TSA. But the reality is the vast majority of our guidance for 2023 is coming from our underlying business versus the TSA. It is not really a meaningful impact.
spk03: Okay. And also one other, do you have any rate feelings on interest rates if for some reason the Fed decides to go crazy?
spk05: We do not.
spk03: Okay. And then, thank you for that. And then, Chris, you know, maybe to ask the question in a different way, you have a clean currency now. that's directly in sort of FinTech land wealth management. I'm curious on sort of two fronts. One, because we didn't really have a chance to discuss this, so new, just how the conversations are going, both internally and externally. You know, obviously you talked about having a really good pipeline on the CPA front, but just how the conversations are going now that you are, you know, rebranded and sort of X tax act, if that has any bearing on, sort of the way that people perceive the company's tax-centric focus, or now that you have exchange currency, if you're able to go out there and say, hey, you know, we've got more interesting opportunities, and, you know, maybe that might sort of recalibrate the way you're thinking about M&A, understanding that obviously this is sort of a choppy market right now.
spk02: Yeah, so let me take the first one. So you can imagine our financial professionals were really excited about the name change. There was some complexity that was introduced over the past years as they communicated to their end clients about the backing and support they had in the organization they were working with because any of their end clients would have had to look up a name that was not directly connected to the name that was on their statement. And so I think there was real enthusiasm across our financial professional base. We think that is a great thing. It also kind of raises the profile of the Avantax brand for prospects, just given that it is now the name of our public company. And so I think there was significant enthusiasm. As it relates to M&A and how we may think about it, We've had a really disciplined strategy over the last few years where we are strong believers in our unique tax focus. And so as we've looked at M&A, there are a couple of primary categories that are relevant. One is our independents who want to affiliate with us in a different way for multiple reasons. One may be they're looking for a succession solution and we can provide that. And others are very growth oriented and want to monetize their great efforts, but also focus their efforts solely on growth and leave some of the back office work to us. And so, as you know, the 20 deals that we've done over the last couple of years have fallen into that category. The second area is other tax-focused financial firms, and HKFS actually falls into that category, right? It was a RAA that was born out of an accounting firm. And so we will continue to look there. What we've seen is that the multiples have been, you know, pretty healthy or extraordinary in those areas for the last couple years. And so we'll continue to monitor the situation in both categories and move opportunistically.
spk03: Great. Thanks very much. Yes, I agree, Chris. So congrats.
spk04: Great. Thanks, Dan.
spk01: The next question comes from Alex Paris with Barrington Research. Please go ahead.
spk07: Hi, everybody. Thanks for taking my questions. Congratulations on a strong finish to the year and all that work you got done. So I have a couple of questions. First, starting with a little bit more information on the TSA. Where does that come in on the P&L? Is it all within discontinued operations, or does it come in through other line items?
spk05: The TSA is not going to come in through disc ops. It's a continuing operations part of our business, and it's going to show up on another income line, but will be part of our adjusted EBITDA forecast. And so it will be split out, but it will be part of our continuing operations financially.
spk07: Okay, gotcha. And then I think you said on the last call that your medium-term target for organic revenue growth is 8.5% to 11% with adjusted EBITDA margins of 16% to 18% once the TSA is behind you. Based on the guidance that you just provided today, at the midpoint, revenue growth is 13%, which is above that. and the midpoint of the adjusted EBITDA target is 17.2% margin. So you're kind of solidly in that EBITDA range, despite the fact that you're still running the TSA. Any additional color there would be helpful.
spk05: Sure. First, on the revenue side, the 8.5% to 11% is in a clean interest rate sort of slash sweep environment. And so what we're trying to do is take the noise out of sweep. And the fact that interest rates continue to go up is helping to some degree our revenue growth for the year. From a margin perspective, you've probably seen from some of our announcements, we've already been able to take some actions as it relates to our cost base. And again, as a result of the rising interest rate environment, we find ourselves in a position to be able to deliver. what we believe is strong profitability for the business as we continue to work through the TSA.
spk07: Great, that's helpful. And then you kind of outlined your assumptions that underlie that guidance for the year. There's a bigger variance in the net income guidance than there is in the revenue guidance. what would drive that income to the higher end of that range versus the lower end of that range?
spk05: So one of the parameters that I shared was how much it would cost to potentially deliver some of the synergies, as well as some other matters that may take place this year. And so what we're trying to do early on in 23 is to provide a wide enough lane for some of the unknowns that may play out over the course of the next 12 months. You know, just certain cost savings may cost more than others, and just some of the other factors that I mentioned during the script may cost more than others, and so we're trying to create just enough flexibility.
spk07: Okay, gotcha. Thank you. I'll take the rest of my questions offline. Appreciate it.
spk01: Again, if you have a question, please press star, then 1. Seeing no further questions, this concludes our question and answer session. I would like to turn the conference back over to Chris Walters for any closing remarks.
spk02: Great. Thank you all for joining us today and for your interest in Avantax. We'll speak to you next quarter.
spk01: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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